Maldives President Dr. Mohamed Muizzu is expected to visit India next week as his government scrambles to avoid a disastrous debt default.
“The president is scheduled to visit India very soon. Discussions are ongoing between Maldives and India on the best date,” spokesperson Heena Waleed told the press on September 10, without providing any further details about the trip.
After ostensibly mending strained ties with the Maldives’ giant neighbor, Muizzu’s first official visit to India since assuming office last year comes with the central bank seeking a $400 million currency swap arrangement under the South Asian Association for Regional Cooperation (SAARC) framework.
The swap deal would effectively be an Indian bailout to help the Maldives make impending interest payments, and shore up dangerously depleted foreign currency reserves.
On September 11, credit ratings agency Moody’s downgraded the Maldives based on an assessment that “default risks have risen materially,” casting doubt on the country’s ability to service substantial debt obligations due over the next two years.
“While the government is working on securing some external financing, comprehensive financing to meet sizeable forthcoming maturities remains uncertain,” Moody’s warned.
The government will have to seek financing “mainly from bilateral sources” because prohibitive rates rule out international bond markets, the agency observed. Securing financial support would buy time to replenish reserves and implement overdue reforms, “thereby avoiding default for the foreseeable future.”
But investors see “no sign” of forthcoming help from either India or China, the Financial Times reported.
The Maldives owes the bulk of its $3.4 billion foreign debt to the two Asian rivals after an infrastructure boom with Chinese and Indian loans over the past decade. According to the World Bank, total public debt reached $8 billion or 122.9 percent of GDP in 2023, ballooning after a debt-fueled economic stimulus to survive the COVID-19 crisis.
To avoid defaulting on creditors, the Maldives needs $114 million this year, $557 million in 2025, and a staggering $1.07 billion in 2026. The latter figure eclipses a gross foreign currency reserve that stood at $437 million at the end of August. This amount – the lowest in eight years – was only sufficient to cover about 1.5 months of imports, Moody’s noted, portending a dire situation for a small island state reliant on imported food, fuel, and medicine.
According to the central bank, the usable reserve – funds readily available after deducting short-term foreign liabilities – improved to $61 million last month after falling to a record low of $44 million in July.
Despite relatively healthy economic growth and U.S. dollar receipts from nearly 2 million tourists annually, the Maldives’ foreign exchange reserves have been dwindling under pressure from external debt payments, government borrowing to plug budget deficits, and an import bill elevated by high global commodity prices.
On top of the deficits, printing money to manage the government’s cash flow during the pandemic created a surplus liquidity of the Maldivian rufiyaa. The higher supply of local currency “weighs further on limited reserves as the central bank commits additional foreign exchange resources to maintain the [15.42 rufiyaa exchange rate] peg to the U.S. dollar,” Moody’s explained.
“In the absence of a comprehensive financing package or very drastic policy adjustments, wide twin deficits and FX imbalances point to significant downside risks with an increasing probability of default,” the agency concluded.
The new Moody’s rating echoed a similar downgrade to “junk” status by Fitch in late August. Fitch cited “a rising degree of uncertainty” regarding the government’s plans to repay a $500 million sukuk, an Islamic Shariah-compliant form of debt due in 2026.
After double-digit losses in August, the Fitch downgrade prompted a selloff as investors dumped the Islamic bonds. Bondholders were also spooked by an aborted move by the Bank of Maldives to impose restrictions on foreign currency transactions. The dollar-denominated sukuk subsequently fell to a record low of 70 cents on the dollar, down from about 93 cents in June.
Doubts over a $25 million coupon payment due on October 8 raised fears that the Maldives could become the first country to default on a sukuk.
“Barring an eleventh-hour infusion of foreign exchange from a friendly overseas government such as China, GCC [Gulf Cooperation Council] or India, the non-payment of the October coupon is a plausible possibility,” Purvi Harlalka, a senior emerging-market sovereign debt strategist at M&G, told Bloomberg.
“The big question is now whether the Muslim countries will ‘allow’ Maldives to default on a sukuk bond,” Soeren Moerch, a portfolio manager at Danske Bank, was quoted as saying by Bloomberg. According to the Financial Times, Gulf states have previously extended support to prevent sovereign defaults for sukuks, bailing out Bahrain in 2018.
On September 4, Maldives Foreign Minister Moosa Zameer visited Abu Dhabi with a message from Muizzu to the UAE president. It was Zameer’s fourth visit to the UAE in less than a year.
The sukuk has since recovered slightly after the Maldives central bank offered “complete assurance” over the bond repayment in October.
“There remains no doubt that the MMA [Maldives Monetary Authority] and the government of the Maldives, together with all related government institutions, will be able to meet all future external debt obligations,” the central bank asserted on September 11 in response to the Moody’s downgrade.
After a 10-year hiatus, open market operations will commence this year to mop up the 6.7 billion rufiyaas ($434 million) surplus liquidity in the banking system, the MMA announced.
Regulatory changes will also be announced this month “to boost the amount of foreign currency entering the domestic banking system,” the central bank revealed. Such rules have long been advocated to tackle an entrenched black market and ensure that a larger share of U.S. dollar revenue from tourism – valued at $3.6 billion in 2023 – is retained in the Maldives.
In a bid to alleviate the persistent dollar shortage, the government is also planning to collect some import duties and income taxes in U.S. dollars while raising dollar-denominated airport service fees.
Addressing concerns over delays in enacting spending cuts and tax hikes announced in June, the Finance Ministry said that “the government has completed the required technical work, and preparations for implementation are currently ongoing.” The Maldives has been engaging with “bilateral and multilateral partners to meet the financing requirements,” it added.
“With the expected economic growth driven by the strong performance of the tourism sector, coupled with the successful implementation of these revenue and expenditure measures, the government remains confident in restoring fiscal and debt sustainability.”